IAS 1 Presentation of Financial Statements

Overview of IAS 1

 Issued: in 1975; re-issued in 2007, followed by amendments

 Effective date: 1 January 2009
 What it does:
o It defines complete set of general purpose financial statements that contains 5
components:
1. Statement of financial position;
2. Statement of profit or loss and other comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes with summary of significant accounting policies and other
explanatory information
o It describes the general features of financial statements:
 fair presentation and compliance with IFRS;
 going concern;
 accrual basis of accounting;
 materiality and aggregation;
 offsetting;
 frequency of reporting;
 comparative information; and
 consistency of presentation.
o It sets the minimum requirements for the content of financial statements; their
identification and structure.

IAS 1 Presentation of Financial Statements represents a basis of the whole IFRS reporting, as
it sets overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.

What is going concern?

It is one of the basic assumptions described in IAS 1 Presentation of financial statements.

It says that all entities have to prepare financial statements on a going concern basis unless
management either intends to liquidate the entity or to cease trading or has no realistic
alternative but to do so.

The problem is that IAS 1 does not tell us how to prepare the financial statements when going
concern does not apply. There is no description of what you should do, how you should apply
IFRS in this case and what policies to adopt when you are not going concern.

It means that we have to apply IFRS standards to the best of our knowledge and you have to
consider carefully your individual circumstances to arrive at appropriate basis of accounting.

How to prepare the financial statements under IFRS when going concern assumption
does not apply?

Alternative: Break-up basis of accounting

You can for example use so-called “break-up” basis of accounting. It is not defined in IFRS,
that’s true, but it is defined in the legislation of some jurisdictions. So if you apply the break-
up basis, then the objective of financial statements is not to assess the financial performance of
an entity as under going concern.

Here, you need to asses:

 Whether the company has sufficient assets to cover its liabilities, and
 If after all liabilities are settled, there will be some surplus or something left to distribute
to shareholders.

However, your financial statements – the statement of financial position and the statement of
total comprehensive income – will still look almost the same way, there’s no special format or
anything. It is more about the way of looking at individual assets and liabilities, about valuing
them and presenting them.

Here, I’d like to outline a few issues to be aware of:

#1 Comply with IFRS

First of all, you still need to comply with the requirements of all other IFRS standards, even if
you are not going concern. So, not applying going concern does NOT make an excuse to depart
from IFRS – that’s simply not true.

#2 Current vs. non-current distinction

Many people believe that they automatically must present all assets and liabilities as current if
they are not going concern. Not true. So, if you classified your assets as non-current under IAS
1, then they are non-current. They can become current if they meet the criteria in IFRS 5 Non-
current assets held for sale and discontinued operations.

So if you plan to sell your PPE and you actively started to offer it at the market, then yes, they
are held for sale, they meet the criteria in IFRS 5. And, this can be true only about some portion
of your PPE. For example, you stopped production and trading, and now you started to offer
your big machines for sale – OK, then classify them as current as they meet IFRS 5 criteria.
But, if you did not do the same with other assets, like cars, computers, etc. – then you have to
keep them as long-term assets.

#3 Perform impairment testing

Liquidation, cessation of trade or production and after all – not going concern are all indicators
of impairment. Why? Because, you are not going to use your assets to generate future economic
benefits anymore and as a result, the recoverable amount can sharply fall down below their
carrying amount. IAS 36 requires performing the impairment test on tangible assets when
there’s an indication of impairment, so there you go. Sure, it does not necessarily mean that
there will be the impairment, because the fair value of your assets can still be higher than the
carrying amount, but you are at risk and you must test it.

#4 Valuation of inventories

As you might remember from IAS 2, you have to carry your inventories at lower of cost and
net realizable value. When you decide to close the business, then the net realizable value of
stock might sharply go down as you are probably going to sell off everything you have in the
warehouse.
#5 Onerous contracts

It can happen that some contracts can become onerous as a result of your decision to cease
trading or close the business. For example, you might need to pay high penalties for early
termination of your lease contracts. Therefore, maybe you need to make a provision in line
with IAS 37.

#6 Government grants

Government grants can become repayable if you are not going concern.

#7 Clearly indicate

Finally, you have to show very clearly that the financial statements are not prepared under
going concern assumption.